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In its weekly release, Houston-based oilfield services company Baker Hughes Inc. ( (BHI - Analyst Report) reported an unchanged U.S. rig count (number of rigs searching for oil and gas in the country), as an increase in the number of gas rigs was offset by a fall in the oil rig count.

Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 2,007 for the week ended January 6, 2012, same as the previous week’s count.

The current nationwide rig count is more than double that of the 6-year low of 876 (in the week ended June 12, 2009) and significantly exceeds the prior-year level of 1,700. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending August 29 and September 12.

Rigs engaged in land, offshore and inland waters activity all remained steady from a week ago at 1,948, 42 and 17, respectively.

Natural Gas Rig Count: The natural gas rig count increased for the second week in a row to 811 (a gain of 2 rigs from the previous week). Despite the weekly improvement, the number of gas-directed rigs is down more than 13% from its 2011 peak of 936, reached during mid-October.

In fact, the current natural gas rig count remains 50% below its all-time high of 1,606 reached in late summer 2008, but has rebounded strongly after bottoming out to a 7-year low of 665 on July 17, 2009. In the year-ago period, there were 914 active natural gas rigs.

Oil Rig Count: The oil rig count was down by 2 to 1,191, the second successive decline after rising to a 24-year high of 1,201 in December 2011. Despite this week-over-week fall, the current tally is way above the previous year’s rig count of 777. It has recovered strongly from a low of 179 in June 2009, rising roughly 6.7 times.

Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 5 remained unchanged from the previous week.

Rig Count by Type: The number of vertical drilling rigs rose by 6 to 631, while the horizontal/directional rig count (encompassing new drilling technology that has the ability to drill and extract gas from dense rock formations, also known as shale formations) was down by 6 at 1,376. In particular, horizontal rig units – that reached an all-time high of 1,184 in mid December last year – rose by 8 from last week’s level to 1,155.

To Conclude

Notwithstanding the modest gains registered by the natural gas drilling activity over the last 2 weeks, it is still down by 123 rigs (or 13%) from the recent highs of 934 in October 28. Is this bullish for natural gas fundamentals? The answer is "no", if we look at the U.S. production and the shift in rig composition.

With horizontal rig count – the technology responsible for the abundant gas drilling in domestic shale basins – currently close to its all-time high, output from these fields remains robust. As a result, gas inventories still remain at elevated levels – 15.2% above the 5-year average and 11.4% higher than the same period last year.

In fact, natural gas prices have dropped approximately 40% from last year’s peak of about $5.00 per million Btu (MMBtu) in June to the current level of around $3.00 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

In the absence of major production cuts or a stronger economy to boost industrial demand, which is responsible for almost a third of gas consumption, we do not expect much upside in gas prices in the near term. This has prompted some companies to alter their spending patterns, away from gas to the more profitable liquids-rich projects.

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